The clock’s ticking toward April 15, and after the country survived the “fiscal cliff,” many filers are scratching their heads while trying to navigate some subtle changes in the tax system.
Most of the new provisions don’t take effect until the next tax season, which covers 2013, but others that were set to expire were extended by the new tax law for 2012.
Here are some of the deductions — all except one were extended through 2013 — that you should be aware of to get the most out of your refund this year:
Teachers can deduct up to $250 per year for items they purchase for their classrooms.
“If you’re a teacher, there’s a good chance you spend some of your own money on stuff for your classrooms,” said Steve Slater, managing director of UHY Advisors Inc., which has an office in Manhattan. “It behooves all teachers to keep track of their expenses.”
Small-business owners are automatically qualified for bonus appreciation to write off 50% of their out-of-pocket capital purchases, such as for computers, equipment or office furniture, but many aren’t aware that they can also apply for Section 179 to write off up to $500,000, Slater advised.
Homeowners who make less than $100,000 can deduct all of their mortgage insurance premiums, in addition to their interest deductions. Those making between $100,000 and $110,000 can deduct a smaller percentage.
College students can use the American Opportunity Tax Credit, which provides a credit of up to $2,500 for tuition and other related expenses for the first four years of postsecondary education if the filer’s income is less than $80,000, or $160,000 for joint filers. This was extended through 2017.
In addition, 40% of the $2,500 is refundable, so if your tax liability is zero, you can still get a $1,000 refund.
There is a separate $4,000 deduction for tuition and fees, but filers can only use one or the other, Slater noted.
“In most cases, the Credit will give you a better benefit,” he advised.
Senior citizens 70 and a half years old and older can make a tax-free retirement distribution of up to $100,000 that goes directly into charity under a provision that was extended through 2013.
Retirees at that age are required to start using roughly 4% of their retirement plan per year, a required minimum distribution. “You can take up to $100,000 and instead of taking the money personally, you tell them to direct it to a charity,” Slater explained. He found a few advantages to doing this.
One is that filers will not have to pay a tax on the distribution, but rather treat it as charity.
The second, he said, is that it poses an opportunity for you to lower your income by $100,000, which may help you avoid some of the new tax rates for higher-income earners.
In addition, for those who earn a million or more per year, in New York state, charitable contributions are only deductible at 50%.
However, if the charitable contribution is deducted automatically from your retirement plan, Slater noted that “this strategy is a perfect way of not losing half of the $100,000 charitable contribution deduction.”